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Market Outlook: Hard to avoid focusing on inflation

Last week the world’s stock markets again showed mixed results. In the United States, the broad S&P Index rose by 0.3% from November 12 to 19, while in Europe the Stoxx 600 lost 0.1%. Sweden’s All-Share Index (OMXSPI) resisted this downward trend, closing the week 1.1% higher. Ten-year US Treasury yields dropped towards 1.52% last Friday, but early this week (November 22-23) they have rebounded to above 1.65%.

The United States

Federal Reserve policymakers signal possible earlier rate hikes

The prevailing inflation levels have accelerated the timelines of the world’s central banks. In the US, Fed policymakers have opened the door to faster tapering of the central bank’s stimulative bond purchases and have also signalled possible key interest rate hikes as early as next year.

Fed chairman nominated for second four-year term

On November 22 President Joe Biden nominated Jerome Powell, a Republican, for a second term as head of the US Federal Reserve. There had been speculation that Lael Brainard, a Democrat viewed by the market as more dovish than Powell, was a strong candidate for the position. Biden instead nominated her as the new Fed vice chair. Both nominations must be approved by the US Senate, which is likely to happen well before their terms begin next February.

 

Europe

Restrictions re-imposed in parts of Europe

COVID-19 transmission has recently surged again in much of Europe, leading to the re-imposition of some restrictions. Austria has announced a full lockdown for those not fully vaccinated and the government says it will require everyone in the country to be vaccinated starting February 1. Pandemic-related restrictions have triggered protests not only in Austria but in Belgium, the Netherlands, Italy and Croatia. New restrictions, especially for the unvaccinated, are also being imposed in Greece, the Czech Republic and elsewhere on the Continent.

 

The Nordic countries

Increased COVID-19 transmission in Norway

COVID-19 transmission has also increased in Norway during November. Last week the number of new cases per day reached a record-high level, while the number of people hospitalised for the disease has doubled since October. There are no signs of new restrictions. This suggests that the direct impact of the new wave on the Norwegian economy will be limited.

The Swedish krona has lost ground

The Swedish krona has depreciated against both the US dollar and the euro. A dollar now costs around 9.05 kronor while a euro costs 10.18 – earlier in November the USD/SEK exchange rate reached as low as 8.52, and the krona had gradually strengthened to slightly less than SEK 10 per euro.

 

SEB: Accelerating change – partnering for a sustainable transition

See last week’s digital event online

Last week we at SEB unveiled our sustainability strategy, including new climate ambitions and goals as well as our role in supporting our customers in their transition to a more sustainable future. During this event, the featured speakers also discussed how partnerships between the business community, political leaders and society at large can drive the transition. The event took place in English.

Read more about this event and watch the broadcast


Our market view

Although share prices have been somewhat shaky in recent days, this seems natural in light of the strong stock market performance of the past several weeks. That upturn pushed several major equity indices (especially in the US) to or above their earlier all-time highs. Given the worries that had accumulated earlier this autumn, such stock market strength may seem surprising. We have seen a weakening in some macroeconomic statistics, continued problems with various bottlenecks in supply chains, soaring commodity prices and dramatically higher inflation. This has led to forecasts of a faster withdrawal of central bank stimulus measures. The US Federal Reserve is now starting to taper its bond purchases, and expectations of future key interest rate hikes have been moved forward.

Yet investors appear to have focused more of their attention on a number of positive forces. The inflation surge is widely regarded as transitory, which seems probable even if high inflation persists for another several months. Investors are also pleased by strong third quarter corporate reports – on the whole, listed companies have continue to show an impressive ability to manage current challenges. We have also recently seen indications that the economic growth outlook has again improved after a slight dip early this autumn.

The fixed income market has remained fairly stable despite recent turbulence in long-term bond yields. Investors probably believe that expected central bank policy tightening and key interest rate hikes will keep long-term inflation under control. We largely share this view but still expect bond yields to climb in response to future key rate hikes – though not on a scale that will necessarily jeopardise either economic growth or equity valuations.

As indicated in the recently published issue of SEB’s Nordic Outlook, we expect growth to remain healthy, although we have lowered near-term forecasts due to recent turbulence. Inflation is naturally a source of concern; if it gets stuck at high levels, along with continued high commodity prices and so on, it will create clear headwinds. Yet there are indications that many of these effects are related to the reopening of economies after the COVID-19 pandemic and are of a transitory nature. Equities will thus continue to enjoy strong fundamentals, including healthy growth and low interest rates.

From recovery to normalisation

In this context, it is important to bear in mind that the economy − and financial markets − are now moving towards a new phase in which powerful and fairly straight-line upturns in growth and corporate earnings during the recovery will now give way to a period of normalisation. During such a transition, problems like the ones we are now seeing often arise. In the short term, the big question for future market performance will be how existing inflation and bottleneck risks play out, along with the ability of companies to continue coping successfully with existing challenges. Looking further ahead, the key question will be how the normalisation process is working − how quickly economic growth will fall to more normal levels and how much interest rates and bond yields will climb during this phase of the economic cycle.

In recent months we have signalled a slightly increased level of caution by lowering the proportion of equities in the portfolios we manage. But we still hold more equities than in a normal situation, and a relatively large proportion of our fixed income investments are in somewhat higher-risk corporate credits. This reflects our view that growth will still remain healthy during the coming year and that increases in interest rates and yields will be relatively limited. However, the time is ripe to adjust our future expected return figures lower − compared to the sharp recovery since last spring − and to prepare for more volatility ahead, both in stock markets as a whole and between different sectors and styles/types of equities. In other words, more turbulence may be waiting around the corner, but as long as positive fundamentals persist there is still some upside potential for stock markets.